Sarah: Hello and welcome to this "Chemicals Conversations" podcast brought to you by Argus Media. In this edition, we'll be sharing a global ethylene market recap ahead of EPCA's annual conference in Berlin and the Argus forum at the same event. We'll go around the regions with an overview of the current market situation and then [inaudible 00:00:25] a little bit on the short-term forecast to the end of the year.
I'm Sarah Rae, VP of Olefins and Derivatives, and I'm joined on this call by Toong Shien Lee, our associate editor for olefins for Asia and Craig Barry, our lead consultant for ethylene based in the U.S. So starting with the current situation, Craig, in the U.S., we've seen a lot of variation month on month this year with the U.S. ethylene exports. Just wondering why that's been the case.
Craig: Hey, Sarah, thanks for the question. Let's just start with the big picture. The U.S. is getting more balance. There's limited new ethylene capacity. But there's been more ethylene derivative capacity. For example, you know, Dow Chemical just started up a very large polyethylene train in June, and several PVC producers have been doing some expansions this year and going back to last year. So over time, we are not surprised to see fluctuations for ethylene exports, but there's been other factors the last six months.
During the first half of this year, the U.S. had a reasonable high number of planned and unplanned cracker outages, which reduced availability of ethylene. Then there has been the back and forth on tariffs, while this never really directly impacted ethylene, but at one stage did hit ethane, which freed up some ships for periods allowing for spikes in ethylene exports. And then the U.S. spot price has been relatively high and are challenging at times. And T.S., where are the operating rates in margins currently in Asia? Any improvement?
Toong: Hi. Asia's cracker operating rates will add an average of 82% in 2024. Year to date so far this year is about 81%. So the operating rates in 2025 so far peak in the first quarter at 83%, but it drops slightly to 79% in the second quarter. Obviously, the rates vary across the region, but the combination of lower demand and poor margins has caused stress. We move to Southeast Asia first. In Southeast Asia there's numbers of crackers have been offline for extended periods because of margin pressures. For example, Lotte Titan in Malaysia and also we have JG Summit in Philippines. And there have been announcements of rationalization in the Japan as well.
In China, ethylene crackers were under spotlights a few months ago because of the tariff concerns. Some crackers went for shutdown while others reduced operating rates over the fear of the lack of ethylene feed stock. But as the concerns are now eased off, we might see stable Chinese crackers operating rates for the rest of the year. For margin-wise, both naphtha and propane-based cracker margins improve slightly this year compared to 2023 and 2024, although they are still in the negative zone, but it's still lower than the pre-2022 levels. The average naphtha cracker margins has increased to negative 158 this year, while in 2024 and 2023 margins were at negative 170 and negative 195 respectively.
Propane cracker margins improved to around negative 25 this year and even turned to positive for short periods of time. While in 2023 and 2022, propane margins were at negative 50 and negative 130 respectively. So you may ask me why Asia's crackers operations and margins both increased this year. While cracker expansions take a break this year because of some delays and there was a lack of supply from the U.S. and the Middle East, and those have lend the major support to Asian crackers this year, plus the crackers in Southeast Asia taken offline. The overall demand is still growing across the region, but at a moderate speed, which could lend limited support. So Sarah, with all the announcement of closure in the Europe, is the market getting tighter? Is there wide spot discounts compared to the contract price have been getting lower in the last weeks?
Sarah: Well, you're quite right, there's been a lot of announcements of closures and rationalization in Europe, and actually the mood is quite depressed. But although, you know, you'd say the ethylene market balance has been tighter, that's not really been driven by those closures or because of high operating rate. Operating rates remain somewhat depressed and somewhat under pressure in Europe. The big reason why the spot price for ethylene has been a bit better in the last weeks is actually about the co-product balances. So propylene has been super long in Europe, and that's meaning that cracker operators don't want to increase rates because it gives them more problems with propylene. So they're holding operating rates low, and that's tightening the ethylene market.
The other thing is with those closures, you think particularly of the Italian crackers where they're still running the derivatives, there is more of a need for product within the market. They're trying to import product or bring it round from northern Europe or bring it in from places like Libya. And as we've heard from Craig, the arbitrage from the U.S. has been challenging at times. The Libyan cracker has been offline. So all in all, there just really hasn't been a lot of spare flex in the system. But if you look at the big picture compared with 2020, by the end of 2027, Europe will have closed eight crackers representing over 4 million tons of capacity.
In global terms that it's not huge. It's only about two or two-and-a-half new world-scale crackers which are being built. And INEOS building one of those within Europe, the 1.4 million-ton Ethan cracker that will be based in Antwerp due to startup in '26, '27. So the net effect is still, you know, 2.7 million tons of lost capacity, which is a lot. And these closures have been driven by, I think, the fact that the European crackers are a bit older. But the big driver is not so much the low operating rates, not so much the low margins, but the need to meet net zero targets and the investment that's required to do that, which is unsustainable or unrecoverable by many of the operators. So that's what's driving it. And it is, I say, quite an odd situation because of that. But Craig, over in the U.S. with all the tariff discussions and disruptions that caused an uncertainty, what are you expecting for the rest of '26 and...sorry, the rest of the year and into '26?
Craig: Good question, Sarah. I mean, clearly there's been a lot of uncertainty following the tariff announcements in April and that thing export restrictions we saw in the second quarter. But however, when you step back and look at, you know, key U.S. trading partners like Mexico, Brazil, and the EU have not implemented reciprocal tariffs against the U.S. So I expect things to kind of remain the same way they are. You know, China has implemented a 10% tariff on most U.S. imports during, you know, the current U.S.-China trade troops. Imports of ethane and polyethylene are gaining momentum again. And I think when you look into the data, you actually see, you know, a pretty good picture.
U.S. exports, so polyethylene grew during the first half of 2025. Ethan exports averaged 520,000 barrels a day during the second quarter higher than, you know, the annual average in 2024 of just 494,000 barrels a day. So I think uncertainty remains a key issue. But currently, I don't expect most U.S. trading partners to impose reciprocal tariffs going forward even into next year. So with that said, Sarah, you know, looking back into Europe, do you anticipate a major change in the market?
Sarah: I don't think so, Craig. I mean, it's one of the things, the second half of the year has never been better than the first half of the year in demand terms, just the way sort of the seasonality works out. So I think the market remains very cautious. There'll be a lot of targets around for year end and stock reduction. You know, we really don't anticipate a major improvement in the market going through the year end. For next year, again, the closures in Europe and maybe a couple more turnarounds will help support rates and margins. But I think it's going to remain a very, very challenging situation into '26 as well. And turn to Asia, T.S., same question to you, what are you thinking for the rest of this year and a little bit into '26, what's going through your mind?
Toong: Thank you, Sarah. So Asia settling prices often lately because of the weak demand, especially after the off of tightness in supplies arising from the disruptions of ethan imports from the U.S. So looking forward, there will be more crackers going for turnaround in October. In China alone there will be at least five of them and then two South Korea crackers and one southeast Asian cracker that will go for turnaround. So the supply tightness might be apparent in the coming fourth quarter, particularly from the South Korea side because of the announcements of shutting down from a key cracker in Yuzu in August mainly because of margin concerns. So in total in Korea there will be three crackers of 14 to be offline during the fourth quarter.
Well, in the medium to long-term in Asia, particularly China, they are still under massive constructions of new cracker projects. We are expecting 8 Chinese crackers total to 7.65 million ethylene capacity to start up in 2025, and another 9 crackers in 2026, which account to 10.7 million tons, and another 6 of them in 2027, which account to another 6.8 million tons. So aside from China, there are also new crackers in South Asia and also Korea, including HBCR [inaudible 00:11:24] Refinery 1.2 million tons of cracker that is due to startup in the second half of 2026 and the Mesir [SP] S-OIL 1.8 million-ton cracker aimed for startup in mid 2026.
So due to the huge expansions, we expect the ongoing down circle of this ethylene industry to prolong. The average operating rate of Chinese ethylene plants will fall to 75% to 76% in 2027 to 2028 before a gradual upturn towards the end of the decade. Downstream industries, including PE, MEG, SM, PVC will also face increasing of capacity and lower than cracker operation rates. This will also result in excessive ethylene monomer supplies.
Sarah: Wow. It's interesting, isn't it, so much new capacity. But we've reached the end of our time and I wanted to say, T.S., Craig, thank you so much for sharing your thoughts and your insights. There's been some interesting market dynamics over the recent past, and I think we're all hoping for economic improvement and better times ahead. But with all of that capacity, maybe realistic is that it's going to stay challenging for some time. For more information about our olefins market coverage, or you'd like to attend our pre-EPCA forum or meet us at EPCA, please get in touch via our website. Thank you for listening.
